Whatever form Brexit
takes, we will keep inflation low and support the economy

Interest rate increases could be "more frequent"
than expected if the economy performs as the Bank of England is expecting,
governor Mark Carney says.

The markets before today were forecasting just one
interest rate increase by 2021. But if there is a resolution to the Brexit
impasse, and inflation and growth continue to pick-up, then more increases are
likely, Mr Carney said.

As expected, the Bank kept interest rates on hold at
0.75% at its latest policy meeting.

Interest rates have been at that level since last
August, when the Bank raised them by a quarter of a percentage point.

The Bank is expecting growth and inflation to pick up
over the next two years.

In a news conference, Mr Carney said: "If
something broadly like this forecast comes to pass... it will require interest
rate increases over that period and it will require more, and more frequent
interest rate increases, than the market currently expects."

The Bank's forecasts are based on a "smooth
adjustment" to any new trading relationship with the European Union.

It also forecasts the unemployment
rate will continue falling in the coming years to 3.5% by 2022, which would be
the lowest rate since 1973.

INFLATION REPORT PRESS CONFERENCE

Opening
Remarks by the Governor

Introduction

Back
in February, the MPC observed that the Fog of Brexit was creating a series of
tensions for UK businesses, households and financial markets, and that this was
occurring against a backdrop of considerable trade and financial pressures in
the global economy.

At
that time, the short-term outlook for the UK economy was subdued, and the data
were expected to be unusually volatile and potentially less informative than
normal. But provided clarity emerged about the future relationship with the EU
and the worst of the global risks were avoided, the MPC expected that UK growth
would pick up to above potential rates, domestic inflationary pressures would
build gradually and a modest ongoing withdrawal of monetary stimulus would be
required to keep inflation sustainably at target over the policy horizon.

So
what has changed since then?

Global
Outlook

In
recent months, global tensions have eased.

In
particular, there has been a further marked easing in global financial
conditions triggered by revisions to the monetary policy outlooks in major
economies. In tandem, global risk sentiment has recovered. This has spilled
over to lower yields and to ease financial conditions in the UK.

There
have also been signs that global trade is stabilising and trade tensions, for
now at least, have abated somewhat.

Partly
as a result, activity appears to be stabilising in the major economies. The
hard data now suggest that global growth troughed towards the end of last year,
and the survey data bottomed out shortly thereafter. Recent developments are
consistent with the MPC’s expectations for a modest pickup in global growth
over the course of this year to around potential rates.

UK
Economy: Past as Prologue?

In
contrast to this more benign global backdrop, domestic tensions remain.

To
get a sense of their consequences, it is helpful to review the how the UK
economy has performed relative to MPC’s forecast from February last year.

Overall
GDP growth appears bang in line with our forecast. However, its expenditure
components are substantially different, with the expected rotation from
consumption towards business investment and net exports failing to materialise.

Offsetting
that positive news, business investment fell by more than 2% rather than
growing by 4%. And net trade subtracted ½ a percentage point from the expansion
instead of contributing ¾ of a percentage point to growth.

Businesses

This
pattern looks set to continue in the near term.

The
latest business investment intentions surveys point to further declines over
the next few quarters, which would mark the longest run of falling investment
in the post-war era.

Unable
to plan for their long-term future, UK businesses have focused on short-term
Brexit contingency plans.

Concerned
about disruptions to trade given the potential 29th March cliff edge, companies
on both sides of the Channel brought forward production, pushing UK goods
imports and exports with the EU to decade highs in the three months to February
despite the doldrums in both economies.

According
to our Agents’ surveys, the proportion of UK firms with contingency plans in
place has risen from around one half in February to over three quarters at
present.

Stock
building has been central to the plans of over two-fifths of survey
respondents, boosting GDP in the first quarter.

Nevertheless,
it remains the case that companies are only as ready as they can be, and they
expect a marked decline in the rate of growth, investment and employment in the
event of a hard Brexit. In recent surveys, firms expected their output would
fall by 3½% in the event of a no deal no transition Brexit.

Faced
with a high option value of waiting for news about Brexit, companies in
aggregate appear to have favoured hiring relative to capital investment.

As
a result, the UK labour market has outperformed expectations over the past
year, with employment and wage growth both surprising on the upside. The
resulting strength in real income growth has supported consumption, which in
turn has driven domestic demand.

Households

Four-quarter
real income growth picked up further in the first quarter, and surveys of consumer
confidence indicate that households remain relatively optimistic about their
own financial prospects, despite being pessimistic about the overall economic
situation.

That
divergence may be the reason why the only area of household spending discernibly
restrained by Brexit is the housing market, where transactions are currently
subdued and prices stagnating.

In
aggregate, Q1 GDP growth is projected to come in 0.3pp stronger than expected
in the February Report.

Around
half of that upside surprise could be due to the boost from Brexit-related
stock building. Consistent with reports from the Bank’s Agents, the MPC expects
a corresponding drag to growth in Q2.

Smoothing
through this volatility, the underlying pace of growth is a touch stronger than
the MPC had previously assessed, though it is still a little below potential,
meaning that the current margin of slack in the economy is expected to widen a
little in coming quarters.

Financial
Markets

While
UK financial markets remain sensitive to Brexit-related news, global
developments appear to have driven down the market curve for Bank Rate that
underlies the MPC’s projections.

Expectations
of policy rates in the US and euro area have fallen significantly since the
February Report and market expectations for the path of Bank Rate have
followed. That path currently implies that Bank Rate will rise to around 1% by
the end of the forecast period, around 15 basis points lower than in the
February Report.

As
the MPC’s inflation forecast suggests, this new market curve introduces an
additional financial market tension to the one already existing between the
current level of sterling and the level that would be consistent with whatever
Brexit outcome that ultimately comes to pass.

The
Economic Outlook

At
some point, the tensions between households, companies and financial markets
will be reconciled.

In
the MPC’s projections, that resolution comes through our assumption of a smooth
Brexit, resulting in a forecast of two phases.

Near-term inflation is
expected to pop above 2% in April and then fall back below target, in large
part reflecting movements in household energy prices and still modest core
services inflation.

In the second phase over
the balance of the forecast, as global growth stabilises around potential rates
and Brexit uncertainties wane:

Business investment
growth recovers, the housing market improves, consumption continues to grow
broadly in line with incomes, and aggregate demand picks up to above potential
rates.

Excess demand rises
slightly above 1% by the end of the forecast period, notably higher than in
February, with the unemployment rate projected to decline to 3½%.

The
emergence of excess demand leads to a strengthening of domestic inflationary
pressures, more than offsetting the fading contribution from import and energy
prices, such that inflation rises above target in two years’ time and continues
rising through the end of the three-year forecast period.

Implications
for Policy

At
its meeting yesterday, the MPC agreed that the current stance of policy
remained appropriate.

The
Committee emphasised that the right path for monetary policy will depend on how
the current tensions between businesses, households and financial markets are
resolved. The response of monetary policy to Brexit will depend on the balance
of its effects on supply, demand and the exchange rate.

The
MPC’s latest projections imply that the current market curve used as the
conditioning assumption for our forecast is unequal to the task of achieving
the MPC’s remit.

Based
on the MPC’s conditioning assumption of a smooth Brexit, the Committee
continues to judge that an ongoing tightening of monetary policy over the
forecast period, at a gradual pace and to a limited extent, would be appropriate
to return inflation sustainably to the 2% target at a conventional horizon.

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